FX Update: US Employment Data - does the market really care?

John J. Hardy, FX Consultant, Saxo Bank

FX Update: US Employment Data - does the market really care?

Today's US employment report provides plenty of ammunition for both the optimists (unemployment rate falls 0.3% o 9.7% and under the key psychological 10.0% level, average weekly hours registered a new increase, suggesting increasing utilization of existing work force and perhaps anticipation of new hiring) and for the pessimists (payrolls shrink yet again and the December data was revised down -65k jobs...).  There is  certainly nothing in today's actual data that is cause for outright panic, which must come from another source (the complex of a Chinese crackdown, Euro fears and public interventionism in the financial sector are the background issues causing risk aversion here and economic data has received less focus) if it is to continue a la yesterday.

It certainly appears the SNB was out late yesterday trying to push the CHF down after all of this Euro panic has seen a rather quick decline in EURCHF, even as USDCHF has rallied fairly well. Trading CHF is a difficult proposition in this market. Unofficial sources are said to have confirmed the intervention.

EUR: Insult to injury
Yesterday, PIGS (Portugal, Italy, Greece, Spain) spreads did not blow out any further on average, but the sovereign CDS prices (insurance against default) certainly did, and this helped fuel the continued punishment of the EUR single currency, which has now lost a remarkable 1500 pips or more since its top just a little over two months ago, reversing gains that took six months to build. To add insult to injury to the Euro in today's session, German Industrial Production in December came in at a terrible level, helping to push EURUSD to a its 1.3650 low, well through the 1.3750 "support" area we expected might contain the sell-off at least briefly on the way down... 1.3510 appears to be the next major target to the downside.

Canada employment
The loonie put up a fight after a very strong Canadian employment report today. The Unemployment report there dropped another couple of notches and the employment  change was extremely positive. The Canadian government statisticians seem to engage in far less manipulation than their US counterparts, as the employment change number tends to jump back and forth rather sharply (the December reading was slightly negative. Still, if we take an average of the readings, the employment change has been positive for the last several months. While we have pointed out on number occasions recently the important flatline area around 1.0700, but the pair is having some tough going after trying to take out the 1.0750 high since November of last year. Today's data combination is not the way higher for USDCAD, which now may need another scary sell-off in risk and energy prices to make any further upward progress.

US employment report
With all of the focus on the Euro and generalized risk aversion (note that the EUR is actually not the weakest currency across the board, the likes of EURAUD and EURNZD are looking at their highest weekly closes in five weeks as long as they don't sell off sharply into the close today. This shows that risk aversion is the strongest theme in the market coming into today.), the question is whether the market decides to focus on the USD today.

With a mixed to positive (we would stress positive despite payrolls headline, though something is fish about the unemployment rate as it should have climbed even further when we are not posting positive payrolls numbers...) US employment report, the market would theoretically be tempted to consolidate the risk trades, in which case we will see whether the USD can gain on its own merits rather than as a safe haven (or perhaps "safety valve" is more appropriate) on risk aversion.

But we may not get the answer to the above question if markets simply continue melt down today again, as this will likely simply support the USD and the JPY in line with yesterday's action. US treasury futures were hammered back lower after the data release, but are mounting a rally attempt again as of this writing...

Chart: USDJPY
A big sell-off yesterday puts the pair back at a new low for the year and all the way to the bottom of the daily Ichimoku cloud. Will the pair try to rally again despite yesterday's steep sell-off on the more or less positive US employment report? US treasuries hold the key to that answer.

Looking ahead
Interesting to see today's US consumer credit data, which has recently been registering historic lows. Next week we have the US Dec. Trade Balance and Jan. Retail Sales, as well as the initial University of Michigan confidence data.

Be careful out there

Economic Data Highlights

• US Jan. ICSC Chain Store Sales rose 3.0% YoY vs. 3.6% in Dec.
• Australia Jan. AiG Performance of Construction Index out at 57.7 vs. 49.3 expected
• Japan Dec. Leading Index out at 94.0 vs. 93.5 expected and 91 in Nov.
• Norway Dec. Industrial Product Manufacturing out at -0.5% MoM and -2.6% YoY vs. +0.4/-1.5% expected, respectively, and vs. -3.3% YoY in Nov.
• UK Jan. PPI Input out at +2.0% MoM and +8.4% YoY vs. +0.8/6.5% YoY expected, respectively, and vs. 7.4% YoY in Dec.
• UK Jan. PPI Output out at +0.4% MoM and +3.8% YoY vs. +0.3/+3.7% expected, respectively, and vs. 3.5% YoY in Dec.
• UK Jan. PPI Core out at +2.5% YoY vs. 2.6% expected and 2.6% in Dec.
• Germany Dec. Industrial Production out at -7.1% yoY vs. -3.7% expected
• Canada Jan. Net Change in Employment rose 43k vs. 15k expected and -2.6k in Dec.
• Canada Jan. Unemployment Rate fell to 8.3% vs. 8.5% expected and 8.5% in Dec.
• US Jan. Unemployment Rate fell to 9.7% vs. 10.0% expected and 10.0% in Dec.
• US Jan. Nonfarm Payrolls fell -20k vs. +15k expected and vs. -150k in Dec.
• US Jan. Average Hourly Earnings rose 0.3% MoM and 2.5% YoY vs. 0.2/2.2% expected, respectively and vs. 2.4% in Dec.
• US Jan. Average Weekly Hours rose to 33.3 vs. 33.2 expected and 33.2 in Dec.

Upcoming Economic Calendar Highlights

• US Dec. Consumer Credit (2000)
• US Fed's Bullard to Speak (2215)
• New Zealand Jan. QV House Prices (Sun 1100)
• Japan Dec. Current Account (Sun 2350)

FX Closing note: EUR falters into the Close ahead of ECB Tomorrow

Market action
Today saw the USD making a bit of a comeback after the bout of weakness in the European session. The headline excuse was a marginally better than expected ADP employment change number for January. But this was hardly credible, as the more important number the ISM non-manufacturing reading for January, showed a barely expansionary reading of  50.5 vs. 51.0 expected and 50.1 in December. The New Orders component was encouraging as it was th highest in some time at 54.7, but a reading like New Export Orders at 46.0 was more than a bit depressing, as was the stubbornly low employment component at a mere 44.6. Although that is the highest number since August of 2008, due to the comparative nature of this survey, this means that all numbers below 50 mean that the situation is worsening from already very bad levels. Let's hope the recovery will push the employment level over 50 in the months to come. Until then, the unemployment rate in the US is likely to remain very high. Consider that in 2004, this employment part of the survey was registering above 55 regularly and that during the darkest days of the 2001 -03 dip in employment, the reading only fell below 45 for a handful of months, vs. the current streak of 18 months at or below that level.

Norges Bank keeps rates steady
Norges Bank earlier today kept rates unchanged as expected, and Gjedrem and company said that the bank has been slower to hike rates than it had previously expected due to the NOK's strength since then. Gjedrem mentioned that house price inflation is high, but future interest rate hikes were not discussed. All in all this is a relatively dovish performance and some might argue that EURNOK is in danger of  forming a double bottom as NOK bulls have to consider the Norges bank's response if the NOK stays strong. Any rally risks being self-defeating. USDNOK had an interesting bullish reversal today after failing to maintain altitude above the 5.90 resistance area this week. USD bulls might consider this cross for another go at the 6.00 level where the 200-day moving average resides.

Technical Developments
EURUSD - very ugly bearish reversal today confirms the downtrend, but we have awfully big event risks in the pipeline. While a lid may be kept on the Greek situation from here on out, there are still plenty of worries in the pipeline with other fiscal and economic weaklings on the Euro periphery, with Spain especially in the spotlight at the moment. Next support of interest below recent lows is 1.3750 and then 1.3500, the former a flatline area of interest, and the latter a Fibo retracement level of interest.

JPY - no emphatic takeout today of the 90.95 resistance in USDJPY, which leaves the pair in a bit of a limbo at the moment. Likewise, EURJPY ran out of fuel ahead of 127.00. Could we be headed for a retest of the recent lows below 125?  If bond bulls remain out in force the answer will be yes. Scenario is highly dependent on tomorrow's ECB and Friday's big US numbers.

GBPUSD - very bearish reversal and outside day today. A 1.5835 support break in the coming days could open up for 1000 pips more of downside, though we don't want to get ahead of ourselves here...

USDCAD - very interesting as the recent rally challenges a key resistance area and the subsequent retracement sets up somewhat of an upside down head and shoulders pattern (yes it's a messy one at best - but this 1.07-08 zone seems critical). Are we gearing up for a go at the 200-day moving average? Oil supply fundamentals are bearish, but oil prices have rallied of late...

AUDUSD - looking much shakier. Event risks just ahead tonight

Looking ahead
Australia data on tap tonight (Retail sales and Building Approvals) and both the ECB and BoE up tomorrow. The ECB will be of the most interest as the market looks at how it tackles the pressures stemming from the Greek situation and the possibility of contagion and any plans it would contemplate putting in place to prevent further trouble.